Punished for missing price targets?

Discussion in 'Trading' started by garfangle, Jul 25, 2003.

  1. One annoying aspect of analysts' pronouncements (here I am exclusively referring to the sell-side) is their often quoted price targets of various stocks, either to buy or short (and cover). For instance, Mr. Top Analyst from Bulge Bracket firm who is covering Cisco may say that he thinks the stock is cheap (aka a value) and that his 6 month price target (from today's 18.58 close) is 26 or a 39.9% gain. He also issues a buy/outperform recommendation.

    After that date, let's say the price closes around 13 (for a loss of 30% from that previous price and a 50% decline from the target price--I won't deal with the opposite where it rises greater than the target price because then the analyst becomes a guru). What usually happens is that the analyst would say that the stock is now even more undervalued and that one should dollar cost average their nominal loss by buying even more stock. Of course, this could have two outcomes: 1) the stock rises enough to where you breakeven your paper loss; 2) it continues to fall and either stays there of a very long time or goes bust.

    It seems that if he is wrong, aside from insider chuckles, that now there is no real punishment by either his own firm or institutional clients (II poll) as long as he gave a good faith effort.

    However, in the REAL world, wrong decisions usually have consequences. If a CEO makes a wrong decision on what product to support he can be fired for the resulting bad business regardless of his effort. If a salesman makes 1000 calls but only garners 2 sales, when he was supposed to get 20, he can be terminated.

    What I am getting at, and because of the new regulatory measures to separate analysts from pressures from banking, it seems that analysts have a free ride to make good, bad or indifferent calls. By this I mean that:

    1) most institutions ignore analysts' recommendations (they only inspect the reports for their insights);
    2) most brokers tell the average investor that the their firm's analysts make no guarantees about future performance of their stock selections and anyways they should do their own research;
    3) since analysts now should have no roll (theoretically) in investment banking, their compensation cannot be tied to whether they bring in clients;
    4) most prop. traders at the analyst's firm, I am sure, do not really make daily trading decisions on the his stock reports (though they may refer to the research from time to time).

    So, what now gets an analyst fired (aside from gross negligence, incompetence, fraud or illegality)?
  2. That's an easy one.

    The answer is:

    NOT giving a strong buy recommendation when the
    guy from their associated trading partner tells him
    to do so in the wash room :D



  3. right on axe :cool:

  4. Telling the truth.
  5. Ha, ha...

    Seriously, if now analysts are basically reduced to simple reporters/journalists, then they should be paid like them. And subsequently, trading costs should fall as well (if there isn't any collusion--as previously happened before being busted).
  6. Wall St got a little slap on the wrist for cheating
    the public for DECADES.

    It is in their BEST INTEREST to continue these crooked
    games and just be more careful about being caught.

    Proving beyond a reasonable doubt that the analysts
    are giving buy recommendations when their trading
    department is ready to dump their position, is very
    hard to prove.

    They will just get smarter...and the games will continue.


  7. ttrader


    Howeer, IF this is really so, do You think it has SUCH an enourmous ipact on the market ? Doubts .... :-|

  8. PetaDollar

    PetaDollar Moderator

    Like anything else, there are some honest ones out there.
  9. I think you missed the point.

    I am not talking about whether analysts can make mistakes in their picks or can own up to them. That is entirely discoverable.

    What I mean is how can firms now evaluate them and hire the best ones if they are not responsible for their own recommendations. Or at least to a much lesser extent.

    At least during the days when compensation was tied to banking, too many wrong calls would be seen negatively in the eyes of prospective clients and the firm could dump the guy for failing to bring in fees.

    Now, they can issue recommendations without regard to their ability to forecast.
  10. I only know that it has an enormous impact
    on some individuals pocket books :D

    They are being robbed, and will continue to be.



    #10     Jul 25, 2003